Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Oil rallies on Yemen conflict
Equities have mostly unwound in Asia with a variety of factors pushing investors into cautious mode. The escalation of the situation in Yemen with Saudi Arabia launching airstrikes has the world on high alert and leaders will no doubt be holding talks to try and find a swift resolution and prevent deeper regional conflict. Predictably, this has had an impact on crude prices with WTI and Brent on the move in Asia, putting on more than 5%. WTI was trading at around $49/bbl at the beginning of Asian trade and is now testing $52/bbl. Meanwhile, Brent has appreciated from around $56.50/bbl to $59.50. The fact that OPEC’s largest oil producer (Saudi Arabia) is involved in a conflict is always going to have a significant bearing on oil prices. Consequently, equities have extended losses which had emanated from weakness in European and US trade. Concerns around Greece saw its yields spike and this weighed on equities. There were also reports the ECB will raise the Greece ELA cap by €1.1 billion at the end of the session. Meanwhile, Greece supposedly has until Monday to detail reform commitments. Additionally, US durable goods orders disappointed and that put US equities on the back foot.
Inflation could be back in focus
Given inflation has been a big talking point for global policymakers recently, it’ll be interesting to see whether oil prices can extend and sustain these gains. This will see energy prices start to rise again and buoy inflation. The worst possible situation will be if inflation picks up but global growth doesn’t. This would limit the room policymakers have to ease in order to support growth. There haven’t been any big fx moves just yet but there are already some safe haven flows into the yen. USD/JPY has slipped and is on the verge of dropping to late February lows. In turn this has weighed on Japanese equities as the Nikkei is underperforming the region. USD/JPY has broken an uptrend support line which has been in place since January and it just seems the pressure could mount in the near term. We have a raft of releases out of Japan tomorrow including household spending, CPI, unemployment rate and retail sales. At the same time out of China we have industrial profits data tomorrow which is likely to show a further decline. This makes for an exciting finish to the week for the region considering how quiet the middle part of the week has been for us.
ASX 200 underperforming
Interestingly China has actually rallied today on a day when equities around the region are struggling. The ASX 200 slipped below 5900 for the first time in a week as investors grow increasingly wary that we can nudge through 6000. Investors were quite happy to hold on to positions early in the week hoping we’d have enough catalysts to finally break through the 6000 barrier. However, given this hasn’t happened and a few risk factors are coming into the market then some investors are happy to take profits off the table. Having said that, I still feel there is plenty of value on the dips, particularly in the yield plays, and the smart money will be looking to take advantage of that. The iron ore saga continues with Rio Tinto’s CEO Sam Walsh today making comments around the Andrew Forest suggested production cap. Perhaps this highlights how out of line Mr Forest was in his suggestion. Regardless, FMG has outperformed the mining space today with a gain of nearly 3%.
Weaker open for Europe
Ahead of the European open, we are calling the major bourses weaker with the key data points being the GfK German consumer climate and European credit aggregates (private loans and money supply). In the UK, we have February retail sales on the docket. On the currency side, the euro has seen signs of life of late, albeit on reasonable short-covering. The single currency will be particularly interesting should we continue to see Greek bond yields rising in the near term and risk aversion ramping up. This could see the currency unwind after its recent resilience.